Should I withdraw from my retirement accounts?
We are finding ourselves afraid to go into debt after our baby, but need to pay for daycare costs and course tuition to renew my nursing license. (Total would be around $10K). It will be a few months before I start making money again and we have nothing to spare and are barely able to stay afloat paying for kids in braces & sports, the mortgage, health insurance and all the usual bills.
Does it make sense to withdraw from our retirement accounts here?
Hi! Thank you for writing and congratulations on your baby. How exciting for you! I hope you are enjoying parenthood with this baby and the others I think you have (the ones in braces and sports!). Ours are 26 and 30 – we loved being parents so much and wish we could go back and do it all over again. We don’t have grandkids yet, but luckily we get to see a lot of our kids!
The other advisors have great advice, and I’d like to add to it. Since you mention daycare costs, I’m assuming that you are still working but that maybe you are not working full time and that’s why you are having some financial difficulties. If you are still working and your retirement account is a 401(k), you could borrow from the account instead of withdraw. That way you don’t have any penalties or tax burden. Assuming you do get back to nursing, you’ll be able to get a good-paying job and pay your loan back. If the money is in an IRA, you can’t take out a loan. In that case, if you withdraw the money (assuming you are younger than age 59 ½, you’d get hit with the 10% penalty plus having to pay tax on the money).
Another thing to look into, depending on how much you make in a year, is that you may qualify for Pell grant or other grants or low-cost loans to pay for going back to school for your license. Go over to the admission department of the school or schools you are looking at and they will help you figure out what financial aid you can get. Keep in mind, too, that you may be eligible for education tax credits to which won’t save you right now but will save you in the future.
I’m sorry that things are tough now financially. I applaud your desire to re instate your nursing license…that will be worthwhile and will mean higher pay and steady work going forward. Please write again if you need more info. Best wishes to you!
I understand, it's tough. I've been there myself. Every family with children faces expenses like these. It seems that juggling financial options is a normal course of family life. None of the things you mention seem eligible for a waiver of the 10% early withdrawal penalty. So, you’ll face federal and state taxes, plus an extra 10% penalty – that’s a heavy tax bite. To net $10,000, you might need to withdraw $14,000-$15,000 from your accounts. If your retirement plan is a 401(k) that offers loans, you might consider borrowing there instead of withdrawing. IRAs don’t allow loans, so that isn’t an option. Although I understand how you feel about debt, any interest charged won’t come close to the tax bite a withdrawal will incur, so a bank or finance company loan might be a tolerable option. Beyond all this, though, there’s a large opportunity cost for taking money out of the tax-free retirement account environment. How much would $15,000 grow to over the next three decades? Paying some interest might be worth it to preserve that money already set aside. As I said earlier, juggling is common with families and you'll just need to make the best decisions you can. Consider the options, make your choice, move forward. No regrets as long as you thoughtfully consider your options. Good luck!
Under normal circumstances, withdrawing funds prior to age 59 1/2 is not necessarily a good idea. It's hard enough to put these funds away much less keep them for 25 to 30 years into the future. However, you sound like you're up against a wall and if the funds that you need are available I would definitely consider making the withdrawal from the retirement account if there are no other options. Before you do, be sure you understand the rules. Let's assume you make a withdrawal of $10,000 in the calendar year 2017. First, there will be a 10% tax penalty of $1,000 that will be added to your total tax bill come next April 15th. In addition, the $10,000 that you withdrew will be added to your taxable income for the calendar year 2017 and additional taxes will be due on that amount. If however your retirement funds are tied up in a 401(k) or 403-B plan, you might see if requesting a loan from the plan that can be paid back over 60 months is a possibiity. If this is in fact a possibility, there will be no tax. I hope this helps and good luck.
In pretty much all financial planning decisions, there are 2 types of criteria to help you make your decision: Mathematical & Emotional.
First, let's take a look at your Math:
1) What type of retirement funds are you accumulating? If you have Roth IRAs, you are able to take the contributions you have added through the years out without penalties or taxes. That would best place to start.
2) If you have Traditional IRAs, you will incur a 10% penalty plus income taxes on your withdrawals. It is possible that you have to take out about $15,000 to get your needed $10,000. If you go back to work in a few months and could pay off the $10,000 debt within a couple of years, you might actually save money by holding the debt and having a plan to pay it off quickly, even if you have to use credit cards!
3) If you have 401ks, you could take a loan out to help pay your daycare costs and tuition. I am not fond of 401k loans as they do complicate things, but as long as you have a real plan to pay it off quickly, it would save you money over getting in debt.
Then the Emotional aspect:
Some people stress with money and having debt in particular. For some people, its better to bite the bullet, take the money out of retirement funds and get it done with. This way you could start anew within a few months. If doing this helps you stay focused on your studying, your goal to get back to work (and take care of the family all at the same time!!!), then this could be the best decision for you.
Financial planning is more than just numbers. I think if you reflected on both Mathematical and Emotional aspects of your decision, you will find the answer that fits your family the best.
I hope this helps.
Thank you for your question, but it is difficult to answer with the facts you have provided. There are certain details that may change the advice and guidance given, but i will do my best with what you have provided. Feel free to reach out if you would like to discuss in detail.
The details that are mssing are whether or not you are considering removing funds from an IRA, Roth IRA or 401(k). These would each entail different consequences to be weighed in the decision making process. There may be other options that may or may not be better depending on which you are considering.
I will try to outline a few of the things to consider:
1) IRA-This withdrawal would be taxable and could be subject to an additional 10% early withdrawal penalty depending on your age and other circumstances. Take a look at this overview on Investopedia.
2) Roth IRA- This may be able to come out with no tax liability if you have met the requirements to remove the funds. Take a look at this overview on Investopedia.
3) 401(k)- Making a withdrawal would incur similiar circumstances to that of an IRA, but you may also have the option to take a loan against your 401(k) and pay it back over time.
You may also want to consider obtaining a Home Equity Line of Credit on your home to have it available in emergency situations like this where there may be a short term need for capital.
Again, I think this is the best I can do based upon the information given. Good luck!